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Daily Newsletter, Thursday, 01/03/2002

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The Option Investor Newsletter Thursday 01-03-2002
Copyright 2001, All rights reserved. 1 of 3
Redistribution in any form strictly prohibited.
***Special Notice***
Today's newsletter includes two new sections, Index Trader
Summary and Game Plans. The analysts at IndexSkyBox, led by
Austin Passamonte, have combined forces with OptionInvestor to
provide readers with more value than ever before. Make sure
to check out the new sections, including the Index Trader
Game Plans, in today's newsletter.
Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP (view in courier font for table alignment)
************************************************************
1-3-2002 High Low Volume Advance/Decline
DJIA 10172.14 + 98.74 10174.01 10051.95 1.4 bln 2106/1052
NASDAQ 2044.27 + 65.02 2044.56 1987.06 2.1 bln 2288/1353
S&P 100 595.13 + 6.15 595.13 588.61 Totals 4394/2405
S&P 500 1165.27 + 10.60 1165.27 1154.01
RUS 2000 495.51 + 8.32 495.52 487.19
DJ TRANS 2727.50 +107.52 2727.50 2620.91
VIX 22.83 - 1.09 24.19 22.82
VXN 47.07 - 0.98 48.78 46.63
TRIN 1.52
Put/Call Ratio .68
*************************************************************
Surprise, Surprise, Surprise!
The tech sector woke up from a holiday nap and roared into 2002.
Upgrades were flying faster than presidents in Argentina, shorts
were running for cover and bears were hunting for a bomb proof
cave. Have the good times returned for good? Tomorrow and Monday
will tell the tale. The chip sector led the parade and cemented
a +13% gain since Monday's lows. The Nasdaq has gained over +5%
since yesterday's lows. Pretty strong moves for a sector that was
unloved just a week ago.
The good news was busting out all over along with stock prices
for those that analysts favored. The chip sector was blessed
by an abundance of upgrades and positive comments. Intel was upgraded
by JP Morgan which suggested that investors buy the stock ahead of
earnings based on improving economic conditions and PC sell through
over the holidays. INTC soared +2.50 to $35.50 and an eleven month
high! This was a stock that has been down trending since Dec 5th.
AMD was upgraded by Robertson Stevens on stronger than expected
sales of their Athalon processor. Intel has been behind on shipments
of P4 processors and AMD has benefited from the shortage. While this
problem will be rectified soon as INTC increases capacity the analyst
thought AMD was still undervalued.
Micron was upgraded by Salomon Smith Barney on rising DRAM prices
and shrinking capacity worldwide. Micron has been selling DRAM
for 80% less than the same period last year but prices have been
rising as plants go offline in the glutted market. MU soared +3.27
to a five month high of $36.50.
AMAT soared +3.82 to $45.39 as shorts raced to cover against the
prospects of a chip revival. KLAC +3.20 and NVLS +4.11.
The positive news was not limited to chips with multiple analysts
making positive comments about the storage stocks as well and
specifically EMC. Rumors that IBM might make an offer for EMC have
cooled but Salomon Smith Barney upped EMC to buy from outperform
saying they were undervalued at their present price. The analyst
feels that the storage sector has been oversold and represents an
opportunity. That opportunity corrected in today's trading with
huge gains in the major players. EMC gained +12%, QLGC gained +9%
or +$4.29. Gains in EMLX were relatively muted at +1.84 but it did
break out to a seven month high of $43.90.
Goldman Sachs analyst, Laura Conigliaro, was pounding the table on
IBM, SUNW and EMC again. Saying that these big caps would lead the
league on any economic rebound she was recommending them. She felt
that IBM had weathered the storm extremely well and probably did
very good in the 4Q as companies upgraded backup systems and security
networks. SunMicro also benefited from a post attack rebound and
network upgrade. She felt the "easy" money was over for these three
companies and they would struggle with gains in the first quarter but
in the long run they would be the leaders of the pack. IBM gained
+2.16 to stop right at strong resistance of $124. We added it as a
call play but only if it can break $124.50 to the upside. We are
concerned about a Dow roll over possibility and would like to buy
it a little cheaper over the next couple of days. In English, buy
the dip or the breakout but stay flat as long as it is flat. I
suggested in the Market Monitor this morning that yesterday's close
of $121 was a buying opportunity and anyone who took that suggestion
and bought the $120.25 open did well.
Techs were not the only beaten down sector that was soaring.
Continental Airlines said their load factor was higher this year
than last, (on fewer planes don't forget) and the transports soared.
A report by Merrill Lynch that said oil could fall to $19 a barrel
in 2002 also helped the beleaguered airlines. CAL soared +2.44 or
+9% and was the biggest gainer in the sector. FDX and UPS gained
ground also on the prospects of lower oil and an economic recovery.
Air shipments were down -14% in November but not near the -23% drop
in October.
Auto sales also came in strong as manufacturers extended their zero
percent interest deals. GM posted a +7% gain in sales and led the
group. GM announced a new gimmick for the 1Q of a $2002 cash back
rebate in hopes of continuing the strong sales. 2001 was the second
best year in history for auto sales with 17.18 million vehicles sold.
Chrysler is extending its 100,000-mile warranty program as an incentive.
The bullish sentiment was so prevalent that a negative warning by
Dow Chemical was completely ignored and the stock finished +1.25
higher. They said they would not hit their estimates of $.10 to $.20
but did not give any guidance of what they would earn. Normally this
would be the kiss of death. A miss of the entire range with no new
guidance but investors shrugged it off and bought the stock. Unbelievable!
Merrill Lynch upgraded it from a buy to a strong buy
saying they were undervalued compared to their peers. Is everybody
smoking something funny or does this seem strange? MER suggested
that investors look beyond the current weakness.
If the old January adage holds this could be a really good year if
the trend from the last two days continues. There are two notable
trends that investors cling to. One is the first five days indicator.
Since 1950 all but four years that posted a gain in the first five
days went on to post gains for the year. Three of those four were
war related exceptions. The uptrend is a better forecaster than the
down days.
Of the 18 years the markets opened down there were 10 that ended up
with gains. It is said that as "the first week goes, so goes January."
The next one is the monthly indicator where "as January goes, so goes
the year." This is the most reliable indicator on record. Using the
broader S&P-500 as the measure, 45 out of 50 times it has been right.
This excludes four years that were flat. Obviously we are only two days
into this January and nothing can be determined yet. Most feel this is
just an old investors tale, like the Superbowl indicator, but the
historical accuracy is amazing. Personally I would not bet money on
it but others do.
The huge bounce we saw on Wednesday and the strong gains from today
have powered the markets from oversold to overbought in only two trading
sessions. The Dow bounced from threatening to break under support at
9950 to dead on resistance at 10170. The Nasdaq bounced from the bottom
of its recent December trading range at 1940 to within 22 points of
its Dec-6th resistance high of 2065. The S&P bounced off support at
1140 and then stopped dead under resistance at the 200 DMA of 1166.
If you look at the individual stock charts you will see huge short
covering bounces. Vertical candles for huge gains of over 10% in many
cases. Look at MXIM, KLAC, CCMP or MCDT for examples of the gains.
This was short covering after being surprised by multiple positive
comments and upgrades on the same day. This was not funds putting
money to work in the markets. According to TrimTabs.com $9 billion in
cash flowed OUT of stock funds in the week ended on Wednesday. OUT
OF STOCK FUNDS! Did that money go to cover holiday shopping? We will
find out soon but the key remains, it did not buy stocks.
Friday morning we get the Jobs Report for December and it could
easily be a market mover. The jobless claims on Thursday spiked
to a four week high as seasonal jobs disappeared. Continuing claims
rose again indicating that getting a new job is still difficult.
I think the Jobs Report is the key on Friday. A large negative
number would put a dose of fear back into investors while a smaller
drop than expected would confirm the beginnings of a recovery.
Positive news could give shorts another case of indigestion and
power the S&P through that resistance.
I would really love to see a breakout of the S&P over that 200 DMA.
That would be the biggest short covering signal we could get. Those
funds holding cash would see that as confirmation of the market
direction and those holding shorts would see it as a painful exit
but one they must take. While I doubt it will happen on Friday I
would love to be surprised just like the shorts were this morning.
Here is how I see it, good jobs = continued rally, bad jobs = worries
that the recession is not over, neutral jobs = earnings become the
focus again. Many analysts feel the recovery is already priced
into stocks and there is no reason to chase them until real earnings
appear. With a neutral jobs report I think Friday will see some
consolidation and maybe a midday pullback. If we get that and a
rally into the close I would open new positions because that would
be bullish for trading on Monday. We should still be cautious on a
day by day basis despite the apparent bullishness.
Enter very passively, exit aggressively!
Jim Brown
Editor
********************
INDEX TRADER SUMMARY
********************
Bustin' Loose?
Austin Passamonte
"Just like the old days" Maria B. cooed at the close of trading
today. Same old sultry voice, but both she and I have aged a
couple of years since the "good old days" of 1999. Can't speak of
she being any wiser although I'd hope for the best, but I've
learned a thing or three along the way myself.
One of those being how fast the market picture can change. Monday
and half of Wednesday looked bearish while the second half of
Wednesday until now completely reversed the scale. What picture do
you suppose big-money fund investors have on their mantle right
now?
(Daily Chart: SPX)
For most of the multi-billion dollar funds it would be the SP02H
S&P 500 futures market, but we'll peek at the cash index instead.
I realize this chart has more scribbling than spilled spaghetti
but bear with me and we'll pick it apart.
First, the pro's index has been behaving nicely in a defined
channel since late September. Four tests of support did hold,
including the last one on Wednesday. Its 200-DMA is right on top
of Friday's close and "coincidently" enough, so is the long-term
descending trendline from August 4th, 2001. That's the overhead
resistance to be dealt with from here.
See how tightly price action has pinched itself into a corner?
Just erase both the black and green line from this channel and
what do you see? A very pointy wedge spanning weeks and months
with that red line for support and purple line of resistance,
along with dark blue 200-DMA.
Make sense? A lot of stored, kinetic energy went into forming that
pattern. It will break soon and hopefully end the range bound,
sideways action of late. Any hints on which way it goes?
Stochastic values are trying to post bullish reversals across
weekly and daily charts as well. Stay tuned!
Best Trading Wishes,
austinp@OptionInvestor.com
************************
YEAR END RENEWAL SPECIAL
************************
I am really happy to announce this years annual renewal special.
We spent considerable time and effort deciding what would be
something traders could actually use instead of something to
collect dust. Each of the editors was tasked to produce an
investor guide covering the topics that our readers have requested
most. We spent hundreds of hours compiling these five special
investor guides to help our readers be better investors. Each
is done with full color charts and graphs and is something you
can refer back to for years to come.
Winning Option Strategies - By Jim Brown
Over 200 pages of strategies from simple calls and puts to
spreads, straddles, naked puts, combination plays, leaps etc.
Each strategy is explained in detail and then followed with
real life applications of how to profit from each one. Jim
teaches entry points, market cycles and general trading
psychology as well as money management and money saving
tips for dealing with your broker when errors occur.
Swing Trading For Success - Austin Passamonte
A descriptive outline providing simple guidelines that allow
you to identify current market direction and profit from the
high-odds price swings that occur within.
The secret of swing trading is exposed: Identify underlying
price direction and wait for brief market moves counter to
that trend. Enter short-term trades at key points where price
action is poised to snap back with the trend and enjoy a large
percentage of winning trades!
This guide has been written as only Austin can and is full of
real tips and profitable trading knowledge. Lots of full color
charts enhance the readers understanding.
Point-and-Figure Charting - Jeff Bailey
In this trading guide, Jeff Bailey reveals the secrets to
interpreting those intriguing supply and demand charts
characterized by columns of X's and O's - Point & Figure
charts.
If you have never used Point-&-Figure charts in your investment
analysis you're missing a vital clue that institutional traders
have been using for years.
Jeff illustrates the basic interpretations for beginners while
also discussing more advanced concepts like the bullish percent
for advanced traders. Those readers who have seen the power in
Jeff's point-and-figure charts can now understand and profit
from this powerful charting method. Real winning tips from our
point-and-figure pro.
Technical Analysis Explained - Eric Utley
There are myriad technical analysis tools for today's trader. Eric
has sorted through the choices and found a mix that provides traders
with a solid foundation for observing and operating in the market.
Long-time subscribers of Option Investor have seen tools such as
Fibonacci retracement brackets used by Eric Utley and Bollinger bands
used by our Leaps Editor, Mark Phillips. This manual details the
aforementioned indicators and others used by the Option Investor
staff. Within the manual, subscribers will discover the philosophy,
integration, and application of many of the most effective technical
analysis tools used by the professionals. For the first time, the
tools used by the Option Investor staff will be made available in
a resource that will enrich and educate its readers.
2002 Mutual Fund Guide - Steve Wagner
Our 2002 Mutual Fund Guide has everything you need to know about
mutual funds. It covers the basics of mutual funds, such as what
they are, how they work and are traded, as well as the different
types and objectives of mutual funds. The guide also offers our
top fund choices in eight broad investment objectives for 2002
and beyond. We provide an unbiased perspective on fund performance,
risks and costs, speaking in terms you can understand and use.
As of May 2001, 93 million individuals, representing 52 percent
of all U.S. households, owned mutual funds. Whether you are an
experienced mutual fund investor or new to mutual funds, you'll
find something of value in our 2002 Mutual Fund Guide.
Aggressive, conservative or income producing, there are funds for
everyone. Where should your retirement savings be? Not in options
we hope!
2002 Options Expiration Calendar Mousepads
You will get two of these handy mousepads with the 2002 options
expirations dates including a reference of month and strike price
codes. These are very popular and this will be our fourth year
of providing these to our readers. You get two, one for home
and one for your office. This way you will never be scrambling
for that date of code.
This may be our best annual renewal special yet. Don't miss out
on this offer.
Click here for more details:
https://secure.sungrp.com/02renewal.asp
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**************************************************************
****************
MARKET SENTIMENT
****************
Year Of The Bull
By Eric Utley
Judging by the last two days, one would think that '02 is going
to be a good year for the bulls. But two days do not make
a month, let alone a year. Or maybe they do. "They" say that
as go the first three days of January so goes the month. And
as January goes, so goes the year. Yes, I know "they" say a lot,
but follow-through into Friday's session would give 'em three
bullish days to start the year.
Whether you believe in the theory or not, the last two days have
been solidly bullish. The new high/new low index continues to
reveal bullish tidings and the advance/decline is most positive.
And then there's volume. Trading activity returned in a big
way during Thursday's session, which added credence to the price
action.
In the options market, the total put/call ratio stayed around
its recent level. But the traders in the QQQs pit were back to
exchanging more puts than calls. It's difficult to say whether
or not the traders in the QQQs were buying puts or selling
them. I like to work from the basis that the trades were
outright buys, or new longs, which would reveal a situation in
which traders shorted into the tech rally today, ahead of the
employment report Friday morning. If new puts were bought
today, there exists the potential for more of an upside move
in tech stocks based on the short covering premise.
Perhaps the most interesting piece of sentiment data from
Thursday was the inaction in the bullish percent data. The
Nasdaq-100 bullish percent chart only picked up three new buy
signals, which was surprising given the last two days of
price action in techs. I figured the 8 percent pop in the
Semiconductor Sector (SOX) would contribute to the Nasdaq-100
bullish percent, but the reason it didn't was because of the
Biotech Index's (BTK) continued drop. The recent addition of
a lot of biotech stocks to the NDX has kept the bullish
percent in bear confirmed territory so far this year. Bad
timing by the Nasdaq.
The NYSE and S&P only added 1 percent apiece to their bullish
percent readings. The bullish price action without the
addition of bullish percent could reveal a situation in which
the stocks rallying are already on buy signals, which could
down the road lead to an overbought market. We've addressed
the relatively high levels of the bullish percent readings in
the recent past, which are interesting in light of the low
levels of volatility gauges.
-----------------------------------------------------------------
Market Volatility
After briefly spiking above the 25.00 level in Wednesday's
session, the VIX worked lower in Thursday's session. The
fear gauge continues to display signs of complacency among
option market participants as it trades near the lower-end of
its historical range. A further decline in the VIX, specifically
down to the 20.00 level, could set-up a bearish scenario for
stocks. The VXN is in a similar position in that the index is
trading near the lower-end of its historical range. Although
with the VXN, the index hasn't been around nearly as long, so
we may come to find that its recent historical range was not
the norm.
CBOE Market Volatility Index (VIX) - 22.83
Nasdaq-100 Volatility Index (VXN) - 47.07
-----------------------------------------------------------------
Put/Call Ratio Call Volume Put Volume
Total 0.68 882,899 599,413
Equity Only 0.56 819,396 458,791
OEX 1.94 7,907 15,365
QQQ 1.90 29,220 55,478
-----------------------------------------------------------------
Bullish Percent Data
Current Change Status
NYSE 55 + 1 Bull Alert
NASDAQ-100 60 + 3 Bear Confirmed
DOW 67 + 0 Bull Confirmed
S&P 500 67 + 1 Bull Confirmed
S&P 100 66 + 0 Bull Confirmed
Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart. Readings above 70 are considered overbought, and readings
below 30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-Day Arms Index 1.21
10-Day Arms Index 1.11
21-Day Arms Index 1.07
55-Day Arms Index 1.10
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when the do, they can signal significant market turning
points.
-----------------------------------------------------------------
Advancers Decliners
NYSE 2106 1052
NASDAQ 2288 1353
New Highs New Lows
NYSE 99 17
NASDAQ 107 12
Volume (in millions)
NYSE 1,412
NASDAQ 2,162
-----------------------------------------------------------------
Commitments Of Traders Report: 12/21/01
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
S&P commercial traders added to both long and short positions in
the prior reporting period. But they added significantly more
long positions, resulting in a decline in the commercial's net
bearish position. Small traders shed more longs than shorts,
resulting in a drop in the group's net bullish position.
Commercials Long Short Net % Of OI
12/11/01 367,397 429,640 (62,243) (7.8%)
12/18/01 391,995 456,968 (64,973) (7.6%)
12/21/01 412,581 471,239 (58,658) (6.6%)
Most bearish reading of the year: (111,956) - 3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01
Small Traders Long Short Net % of OI
12/11/01 158,490 86,717 71,773 29.2%
12/18/01 158,300 80,507 77,793 32.4%
12/21/01 152,521 79,444 73,077 31.5%
Most bearish reading of the year: 36,513 - 5/01/01
Most bullish reading of the year: 91,122 - 3/06/01
NASDAQ-100
Big changes last week in the Nasdaq-100 position! Commercial
traders shed nearly 11,000 short positions, resulting in a
dramatic swing in their net position to decidedly bullish.
Meanwhile, small traders went in the exact opposite direction
by adding a large number of short positions, establishing a
big net bearish position.
Commercials Long Short Net % of OI
12/11/01 45,468 51,392 (5,924) (6.1%)
12/18/01 55,276 58,433 (3,157) (2.8%)
12/21/01 55,250 47,476 7,774 7.6%
Most bearish reading of the year: (15,521) - 3/13/01
Most bullish reading of the year: 7,774 - 12/21/01
Small Traders Long Short Net % of OI
12/11/01 12,425 11,754 671 2.7%
12/18/01 17,649 18,626 (977) (2.7%)
12/21/01 15,810 25,687 (9,877) (23.8%)
Most bearish reading of the year: (9,877) - 12/21/01
Most bullish reading of the year: 8,460 - 3/13/01
DOW JONES INDUSTRIAL
Commercial traders' net position remained relatively flat in
the prior reporting period. Small traders added to their net
bearish position by about 600 contracts.
Commercials Long Short Net % of OI
12/11/01 23,135 12,576 10,559 29.6%
12/18/01 21,919 13,810 8,109 22.7%
12/21/01 15,492 7,335 8,157 35.7%
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 15,135 - 10/16/01
Small Traders Long Short Net % of OI
12/11/01 3,469 9,065 (5,569) (44.4%)
12/18/01 6,790 10,943 (4,153) (23.4%)
12/21/01 4,293 9,086 (4,793) (35.8%)
Most bearish reading of the year: (8,777) - 10/12/01
Most bullish reading of the year: 1,909 - 1/16/01
Year Of The Bull
By Eric Utley
Judging by the last two days, one would think that '02 is going
to be a good year for the bulls. But two days do not make
a month, let alone a year. Or maybe they do. "They" say that
as go the first three days of January so goes the month. And
as January goes, so goes the year. Yes, I know "they" say a lot,
but follow-through into Friday's session would give 'em three
bullish days to start the year.
Whether you believe in the theory or not, the last two days have
been solidly bullish. The new high/new low index continues to
reveal bullish tidings and the advance/decline is most positive.
And then there's volume. Trading activity returned in a big
way during Thursday's session, which added credence to the price
action.
In the options market, the total put/call ratio stayed around
its recent level. But the traders in the QQQs pit were back to
exchanging more puts than calls. It's difficult to say whether
or not the traders in the QQQs were buying puts or selling
them. I like to work from the basis that the trades were
outright buys, or new longs, which would reveal a situation in
which traders shorted into the tech rally today, ahead of the
employment report Friday morning. If new puts were bought
today, there exists the potential for more of an upside move
in tech stocks based on the short covering premise.
Perhaps the most interesting piece of sentiment data from
Thursday was the inaction in the bullish percent data. The
Nasdaq-100 bullish percent chart only picked up three new buy
signals, which was surprising given the last two days of
price action in techs. I figured the 8 percent pop in the
Semiconductor Sector (SOX) would contribute to the Nasdaq-100
bullish percent, but the reason it didn't was because of the
Biotech Index's (BTK) continued drop. The recent addition of
a lot of biotech stocks to the NDX has kept the bullish
percent in bear confirmed territory so far this year. Bad
timing by the Nasdaq.
The NYSE and S&P only added 1 percent apiece to their bullish
percent readings. The bullish price action without the
addition of bullish percent could reveal a situation in which
the stocks rallying are already on buy signals, which could
down the road lead to an overbought market. We've addressed
the relatively high levels of the bullish percent readings in
the recent past, which are interesting in light of the low
levels of volatility gauges.
-----------------------------------------------------------------
Market Volatility
After briefly spiking above the 25.00 level in Wednesday's
session, the VIX worked lower in Thursday's session. The
fear gauge continues to display signs of complacency among
option market participants as it trades near the lower-end of
its historical range. A further decline in the VIX, specifically
down to the 20.00 level, could set-up a bearish scenario for
stocks. The VXN is in a similar position in that the index is
trading near the lower-end of its historical range. Although
with the VXN, the index hasn't been around nearly as long, so
we may come to find that its recent historical range was not
the norm.
CBOE Market Volatility Index (VIX) - 22.83
Nasdaq-100 Volatility Index (VXN) - 47.07
-----------------------------------------------------------------
Put/Call Ratio Call Volume Put Volume
Total 0.68 882,899 599,413
Equity Only 0.56 819,396 458,791
OEX 1.94 7,907 15,365
QQQ 1.90 29,220 55,478
-----------------------------------------------------------------
Bullish Percent Data
Current Change Status
NYSE 55 + 1 Bull Alert
NASDAQ-100 60 + 3 Bear Confirmed
DOW 67 + 0 Bull Confirmed
S&P 500 67 + 1 Bull Confirmed
S&P 100 66 + 0 Bull Confirmed
Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart. Readings above 70 are considered overbought, and readings
below 30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-Day Arms Index 1.21
10-Day Arms Index 1.11
21-Day Arms Index 1.07
55-Day Arms Index 1.10
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when the do, they can signal significant market turning
points.
-----------------------------------------------------------------
Advancers Decliners
NYSE 2106 1052
NASDAQ 2288 1353
New Highs New Lows
NYSE 99 17
NASDAQ 107 12
Volume (in millions)
NYSE 1,412
NASDAQ 2,162
-----------------------------------------------------------------
Commitments Of Traders Report: 12/21/01
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
S&P commercial traders added to both long and short positions in
the prior reporting period. But they added significantly more
long positions, resulting in a decline in the commercial's net
bearish position. Small traders shed more longs than shorts,
resulting in a drop in the group's net bullish position.
Commercials Long Short Net % Of OI
12/11/01 367,397 429,640 (62,243) (7.8%)
12/18/01 391,995 456,968 (64,973) (7.6%)
12/21/01 412,581 471,239 (58,658) (6.6%)
Most bearish reading of the year: (111,956) - 3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01
Small Traders Long Short Net % of OI
12/11/01 158,490 86,717 71,773 29.2%
12/18/01 158,300 80,507 77,793 32.4%
12/21/01 152,521 79,444 73,077 31.5%
Most bearish reading of the year: 36,513 - 5/01/01
Most bullish reading of the year: 91,122 - 3/06/01
NASDAQ-100
Big changes last week in the Nasdaq-100 position! Commercial
traders shed nearly 11,000 short positions, resulting in a
dramatic swing in their net position to decidedly bullish.
Meanwhile, small traders went in the exact opposite direction
by adding a large number of short positions, establishing a
big net bearish position.
Commercials Long Short Net % of OI
12/11/01 45,468 51,392 (5,924) (6.1%)
12/18/01 55,276 58,433 (3,157) (2.8%)
12/21/01 55,250 47,476 7,774 7.6%
Most bearish reading of the year: (15,521) - 3/13/01
Most bullish reading of the year: 7,774 - 12/21/01
Small Traders Long Short Net % of OI
12/11/01 12,425 11,754 671 2.7%
12/18/01 17,649 18,626 (977) (2.7%)
12/21/01 15,810 25,687 (9,877) (23.8%)
Most bearish reading of the year: (9,877) - 12/21/01
Most bullish reading of the year: 8,460 - 3/13/01
DOW JONES INDUSTRIAL
Commercial traders' net position remained relatively flat in
the prior reporting period. Small traders added to their net
bearish position by about 600 contracts.
Commercials Long Short Net % of OI
12/11/01 23,135 12,576 10,559 29.6%
12/18/01 21,919 13,810 8,109 22.7%
12/21/01 15,492 7,335 8,157 35.7%
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 15,135 - 10/16/01
Small Traders Long Short Net % of OI
12/11/01 3,469 9,065 (5,569) (44.4%)
12/18/01 6,790 10,943 (4,153) (23.4%)
12/21/01 4,293 9,086 (4,793) (35.8%)
Most bearish reading of the year: (8,777) - 10/12/01
Most bullish reading of the year: 1,909 - 1/16/01
-----------------------------------------------------------------
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INDEX TRADER GAME PLANS
***********************
IS Swing Trade Model: Thursday 1/03/2002
Indexes Still Swinging Higher
News & Notes:
------------
This model entered new call plays tracked on the Big Four indexes
early Thursday morning. Price action popped higher, went flat all
day and continued the rally in the final two hours exactly when
the next move was expected. Which way it would be was uncertain,
but very clear intraday wedge consolidations told us it would
happen.
Featured Markets:
----------------
[60/30-Min Chart: OEX]
The OEX popped above our call-play entry triggers right from the
gate and never looked back. The subsequent consolidation (light
blue wedge, right) broke higher from the 592 area and gained 3
more index points into the close. A continuation pattern, it turns
out in hindsight that gives some comfort to tracking open plays
over the close.
[60/30-Min Chart: SPX]
Same picture for the SPX. As noted in Wednesday's Market Monitor
at 1:43pm EST, the index broke higher from 1142 area to close 12
index points higher and extend its run 23 index points higher from
there. For those who may have held calls or long e-mini futures
along the way, simple gains were there to be had.
The same wedge pattern entry presented itself today near 1160 and
offered 5 more index points into the close. That is thin for
option trades, but e-mini contracts at $50 gain per index point is
more than nothing!
[Daily / 30-Min Chart: QQQ]
QQQ popped at the open, broke our entry triggers and moved higher
from there. Broke another intraday pattern and uses it as support
heading into Friday. The 41.00 are should hold, or next stop lower
is 40.20 area again.
Summation
Minimal gains are tracked in current open plays and stop orders
moved up to minimize risk. Traders should place dollar stops for
the exact-same price contracts may have been entered on or
slightly lower at worst. Entering at "ask" and exiting at "bid"
for the S&P players eats up precious gains in the process, so
managing stops and eliminating risk is much tougher there than the
QQQ market. No perfect or ideal stop-management scenario exists
for all, so the Swing Trade model merely tracks exit points as
actual index levels instead.
Strong markets will go higher and break resistance hovering right
above. Sideways markets will not, and either way we're prepared
from here. For many who asked, we will monitor and update tracked
plays within Market Monitor window as necessary while continuing
to point out intraday entry points for other possible plays as
well.
Trade Management:
----------------
Option traders may choose listed In-The-Money (ITM) or Out-The-
Money (OTM) contracts by personal preference. They are selected
based on volume, open interest and "Delta" values in that order.
Our preference is usually OTM contracts except for the last few
days of expiration when ATM or ITM contracts are preferred.
Entry triggers are points where plays are tracked when price
action breaks above for calls or below for puts. Stops are the
exact opposite of that. Sell targets are points to exit based on
index levels or %gain on option contract price as noted.
*No entry targets listed mean the models are idle at that time.
New Play Targets:
----------------
None... tracking long calls
QQQ DJX
Jan Calls: 41 (QQQ-AO) Jan Calls: 102 (DJV-AX)
Long: BREAK ABOVE Long: BREAK ABOVE
Stop: Break Below Stop: Break Below
Jan Puts: 40 (QQQ-ML) Jan Puts: 99 (DJV-MP)
Long: BREAK BELOW Long: BREAK BELOW
Stop: Break Above Stop: Break Above
=====
OEX SPX
Jan Calls: 600 (OEY-AT) Jan Calls: 1125 (SPT-AE)
Long: BREAK ABOVE Long: BREAK ABOVE
Stop: Break Below Stop: Break Below
Jan Puts: 580 (OEB-MP) Jan Puts: 1150 (SPT-MJ)
Long: BREAK BELOW Long: BREAK BELOW
Stop: Break Above Stop: Break Above
Open Plays:
----------
QQQ DJX
Jan Calls: 41 (QQQ-AO) Jan Calls: 102 (DJV-AX)
Long: BREAK ABOVE 40.60 Long: BREAK ABOVE 101.00
Stop: Break Below 41.00 Stop: Break Below 101.00
OEX SPX
Jan Calls: 600 (OEY-AT) Jan Calls: 1125 (SPT-AE)
Long: BREAK ABOVE 590.00 Long: BREAK ABOVE 1156.00
Stop: Break Below 593.50 Stop: Break Below 1163.00
IS Position Trade Model: Thursday 1/03/2002
Finally Going Higher?
News & Notes:
------------
Was today the decisive move markets have been teasing anxious
bulls with for the successful assault on long-term resistance
overhead? We'll have a much better idea by the close of Friday's
session, but hindsight is always clear. What may a bit of
foresight offer right now?
Featured Plays:
--------------
[Weekly/Daily Charts: SPX]
The S&Ps continue higher in their ascending channel and remain
poised to break this coiled wedge in daily-chart time frame
(right). Support held on Wednesday while the 200-DMA resistance
held on Thursday. Will either prevail on Friday? Soon? Don't know
for sure, but stochastic values are flashing bullish reversal
attempts in a "short-cycle" move after release from overbought
extreme.
[Weekly/Daily Charts: QQQ]
The NDX already broke above its 200-DMA and wedge, now treating
both as support from here. Stochastic values mixed to turning
bullish at this time.
Summation:
---------
Major indexes looked very weak after Monday and look quite strong
after Wednesday. Neither session managed to break support or
resistance across all markets, although the nod is given to bulls
right now unless Friday ends in red.
That being said, no buy & hold call option plays exist tonight as
all charts seem poised to move higher but from already extended
position. Anxious traders are always welcome to just step in and
"buy in space" while hoping for the best, but that approach lies
outside our deliberate position trade setup parameters.
Proof of directional action could come tomorrow, but most major
markets are still below December 3rd session highs and numerous
measures of resistance as well.
Trade Management:
----------------
Option traders may choose listed In-The-Money (ITM) or Out-The-
Money (OTM) contracts by personal preference. They are selected
based on volume, open interest and "Delta" values in that order.
Position Trade model usually tracks OTM contracts with several
weeks of time premium left until expiration for buy & hold plays.
Entry triggers are points where plays are tracked when price
action breaks above for calls or below for puts. Stops are the
exact opposite of that. Sell targets are points to exit based on
index levels or %gain on option contract price as noted.
*No entry targets listed mean the models are idle at that time.
New Play Targets:
----------------
None
Open Plays:
----------
DJX
Feb Puts: OTM 98 (DJV-NT)
Long: 2.00
Stop: 1.00
OEX
Feb Puts: OTM 560 (OEB-NL)
Long: 11.10
Stop: 5.50
SPX
Feb Puts: OTM 1125 (SPT-NE)
Long: 24.60
Stop: 13.00
RTH
Feb Puts: ITM 41 (RTH-NR)
Long: 1.60
Stop: 0.90
PPH
Feb Puts: ITM 95 (PPH-NS)
Long: 1.70
Stop: 0.90
XLI
Feb Puts: ITM 28 (XLI-NB)
Long: 1.00
Stop: 0.60
Sector Share Trade Model: Thursday 1/03/2002
Managing Risk
News & Notes:
------------
So far we've tested short share plays in several sectors and
either/or for the QQQ and IAH. We should have lumped in the SMH
(either) and BBH short to that list and will surely keep a closer
eye on these volatile symbols for sure. Now it's time to keep more
gains than we give back!
Featured Plays:
--------------
[Daily/Hourly Charts: QQQ]
QQQs and IAH (not pictured) gapped slightly higher at the open and
soon broke our long-share triggers from there. Late in the session
we saw price action consolidate via intraday charts (right) and
then break higher from there in continuation fashion. The bottom
of that flag pattern in every symbol's chart is the next support
we will defend. A break below it takes us out, and that may happen
as intraday charts appear extended right now.
A strong market will not take out our stops while a questionable
one will. Simple as that.
[Daily/Hourly Charts: Dow]
Speaking of taking out stops, the short DIA shares are in trouble.
We went short at a break below 10,000 and will snug our exit stop
down to 10,200 as daily charts form a bullish triangle pattern.
Note that price action halted right at the highs of Dec 3rd one
month ago and has made zero upward progress since then, one whole
month later. Sideways anyone?
Daily chart stochastics are making a bullish touch or "kiss" and
higher prices on Friday will show us the door in a hurry on this
one. That already happened in the short SPY shares for minimal
drop and DIA may follow suit tomorrow.
Summation
We have moved stops to just below support or just above resistance
on long and short shares respectively, and will continue to do so
as price action dictates. A directional market either way will
keep us in the game while continued sideways chop will take us out
with minimal if any pain.
Rule #1: Minimize or prevent loss.
Rule #2. Everything else falls in place behind this.
Trade Management:
----------------
Entry triggers are points where plays are tracked when price
action breaks above for calls or below for puts. Stops are the
exact opposite of that. Sell targets are points to exit based on
index levels or %gain on share price as noted.
No entry targets listed mean the model is idle at that time.
* Asterisk means stop-loss level changed since prior posting
New Play Targets:
----------------
None
Open Plays:
----------
01/02
SPY
Short: BREAK BELOW 114.80
Stop: Break Above 116.00 [hit]
Result: - 1.20
XLI
Short: BREAK BELOW 27.70
Stop: Break Above 30.00
DIA
Short: BREAK BELOW 100.00
Stop: Break Above 102.00 *
OEF
Short: BREAK BELOW 58.75
Stop: Break Above 60.00
RTH
Short: BREAK BELOW 96.45
Stop: Break Above 97.00 *
PPH
Short: BREAK BELOW 98.50
Stop: Break Above 99.00 *
01/03
QQQ
Long: BREAK ABOVE 40.60
Stop: Break Below 40.00 *
IAH
Long: BREAK ABOVE 40.00
Stop: Break Below 39.75 *
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The Option Investor Newsletter Thursday 01-03-2002
Copyright 2001, All rights reserved. 2 of 3
Redistribution in any form strictly prohibited.
****************
PICKS WE DROPPED
****************
When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.
CALLS:
*****
XMSR $15.59 -1.45 (-2.36) XMSR substantially dropped for a
second consecutive day after a Wall Street Journal article
talked down the company's service. The stock shed 8.50% on
the article, which brought an end to the up-trend. Traders
with open positions should look for any signs of strength
early tomorrow to exit.
ABI $36.06 -1.94 (-4.11) The three-day weakness in the BTK.X
pressured ABI this week. The stock did show signs of life
with its bounce yesterday, but the continued weakness in
today's session brought an end to our play. Look for a bounce
tomorrow to use as an exit, but with the after hours news from
ABGX, the set-up for tomorrow's sessions doesn't appear good
for biotech stocks.
MDT $49.51 -0.49 (-1.72) The selling got started early yesterday,
as MDT fell below its ascending trendline at the open. The stock
didn't find support until the $49.50 level, but there was
actually some decent buying into the close, as price rose back
above our stop. But the sellers were back in force this morning,
briefly driving MDT below the $49 level before any decent support
was found. But the rebound today wasn't enough for the stock to
regain our $49.75 stop level. Although it gave us some moderate
gains towards the end of the year, we have no choice but to drop
the play tonight due to its poor performance in the first two
days of the new year.
PUTS:
*****
DOW $35.44 +1.25 (+1.69) In a classic short on the rumor,
cover on the news story, DOW warned this morning then
proceeded to plow higher through the session. The stock
broke back above its major moving averages and closed near
its high for the day. Traders who didn't get stopped out
after today's rally should look for any weakness early
tomorrow to exit plays.
ANN $36.16 +1.16 (+1.48) ANN bucked the weakness in the broader
retail sector Thursday by advancing past the $36 level. The
RLX.X finished fractionally lower, while ANN tacked on more than
3%. The strong finish and divergence in ANN, combined with the
violation of our stop, was reason to drop coverage this evening.
Hopefully the tight stop at $36 got you out of the play today.
If it didn't, look for weakness tomorrow to trim losses.
FLIR $41.14 +3.24 (+2.36) The bulls are back in town, and they
gave shares of FLIR plenty of attention on Thursday, pulling off
a 8.5% advance. That was enough to power the stock up to its
long-term ascending trendline, and tomorrow could see the stock
push through the $42 resistance level, also the site of the
20-dma. This isn't the sort of strength that we want to bet
against, so we are dropping the play tonight, even though FLIR
closed fractionally below our stop. Use any weakness on Friday
to exit the play at a more favorable price.
***********************************************************
DAILY RESULTS
***********************************************************
Please view this in COURIER 10 font for alignment
*************************************************
Please view this in COURIER 10 font for alignment
*************************************************
CALLS Mon Wed Thu
ACF 30.41 -0.45 -1.53 0.39 Downgrade Wednesday hurt
ACS 102.98 -0.19 -0.90 -2.25 New, superior tech stock
XMSR 15.59 0.41 -1.32 -1.45 Dropped, bearish WSJ piece
ABI 36.06 -0.90 -1.27 -1.94 Dropped, biotech weakness
EMMS 22.60 -0.11 -0.64 -0.40 Consolidating recent gains
ESRX 46.00 -0.22 -0.40 -0.36 Slowly drifting lower
GNSS 68.86 -0.98 1.07 1.67 Waiting for the $70 breakout
NVDA 71.71 -0.81 0.40 4.41 Setting a new 52-week high
RFMD 22.78 -0.97 0.72 2.83 Bullish wireless sector
VRTS 47.89 -1.63 0.99 2.08 Solidly above the 200-dma
MDT 49.51 -0.02 -1.21 -0.49 Dropped, below trend line
UTX 66.00 -0.22 -0.29 1.66 New, rebounding airlines
PUTS
WEBX 26.32 -1.25 -0.63 2.10 Closed near resistance THU
CORR 23.12 -0.83 0.01 -0.82 Working in our favor
EDMC 35.05 -1.27 -0.17 -1.03 New, good economy is bad
DOW 35.44 0.03 0.27 1.25 Dropped, higher on warning
ANN 36.16 0.32 0.00 1.16 Dropped, sector divergence
CERN 49.80 -0.76 0.02 -0.15 Under performing software
FLIR 41.14 -0.86 -0.02 3.24 Dropped, big breakout
EBAY 68.00 -1.09 -0.73 1.83 New, rollover at resistance
CVTX 49.29 -1.66 -0.98 -1.75 New, head-and-shoulders top
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********************
PLAY UPDATES - CALLS
********************
ACF $30.41 +0.39 (-1.59) AG Edwards downgraded ACF from a strong
buy to a hold rating yesterday morning which added pressure to the
stock. The broader financial sector was weak which also played
into the stock's pullback. But ACF managed to rebound back to its
10-dma in Wednesday's session and traded higher into Thursday's
session. The sector impact is important in this play as ACF
needs the BKX.X to trade higher. Continue monitoring the price
action of the BKX.X and watch for ACF to trade above the $31.15
level early tomorrow. Such a move could support a retest of highs
and possibly a run into the company's earnings announcement one
week from today. Once above the $33 level, ACF could make a run
above $35 into the announcement.
EMMS $22.60 -0.40 (-1.15) Our EMMS play has been notable this
week due to its lack of strength. With the broad market looking
strong, shares of EMMS have been drifting lower, coming to rest
just above the 10-dma ($22.48) on Thursday. The stock's
inability to push through its 200-dma (now at $23.76) has us a
bit concerned, so we want to be cautious going forward. This
could be just consolidation ahead of the next push higher, or a
warning that the run is over. The series of lower highs this
week tilts the scales in favor of the bears, although it has
been encouraging to see support building near $22.40. A bounce
from the $22 level looks buyable, and even a dip to $21 still
looks healthy, so long as it is followed by decent buying volume.
But a break below the 20-dma ($20.95) will likely have us
exiting the play. Don't forget, EMMS is scheduled to release
its earnings report on January 8th before the market opens.
ESRX $46.00 -0.36 (-1.08) Following its addition into the
NASDAQ-100, shares of ESRX have been slowly drifting lower, and
the stock is approaching the point where we will have to
consider letting it go. While still above our $45 stop and the
20-dma ($45.24), the price action has not been encouraging in
light of the broad market strength. The one encouraging note
is the fact that volume has been rather light throughout this
decline, leading us to believe it is simply profit taking.
Consider initiating new positions on a bounce from the vicinity
of the 20-dma, but lookout if the selling becomes more intense.
We're keeping our stop in place at $45, as a drop below that
level would be a strong signal that the bulls have lost control.
Traders looking for some conviction before playing will want to
wait for ESRX to clear the $47.50 level, and ideally the
200-dma ($47.90) before venturing into new positions.
GNSS $68.86 +1.67 (+1.76) The bouncing around in Semiconductor
stocks this week has kept us on our toes, but the last 2 days'
strength in the SOX index appears to have the buyers back on the
offensive. Shares of GNSS started the new year on the
defensive, but after finding support just above $64 on Wednesday,
the stock staged an impressive rebound from the 20-dma (now at
$65.84). In fact, the stock briefly pushed through the $70
level on Thursday, before late-day profit taking took hold. But
the overall picture still favors the bulls. As traders position
for the breakout over the $71 resistance level, we want to use
intraday dips to support, first at $68 and then $66, to initiate
new positions. The month-long ascending trendline is now just
above $64, so we're raising our stop to that level tonight.
Momentum traders will want to wait for GNSS to trade through the
$71 level on solid volume before adding new positions.
NVDA $71.71 +4.41 (+4.00) NVDA is entering the new year the same
way it left the old one -- setting new 52-week highs. Based on
the stock's behavior since the October lows, it is clear that
dips are still buyable, in what has become one of the new
momentum favorite among technology bulls. Wednesday's early
weakness gave us another of those dips, as the stock fell to the
$65.50 level, just above the 20-dma (then at $64.47) before
recovering all its intraday losses to close back above its
3-month ascending trendline. The Semiconductor index (SOX.X)
was far and away the best performing sector on Thursday (+8.28%),
and NVDA benefited from the sector strength, gaining more than
6.5%. The SOX is nearing major resistance near $600, and any
profit taking near that level should give us another dip to
support for fresh entries. Look for a bounce near $69.50 or down
around $68 to provide your entry trigger. We're raising our stop
to $66, just below the ascending trendline.
RFMD $22.78 +2.83 (+2.58) Rally ho! The first 2 days of the new
year have certainly been exciting for RFMD investors. The early
dip on Wednesday proved to be an excellent entry point, as the
stock found support near $18.75 and rallied into the close. The
buying party really got going this morning as the stock rocketed
through the $21 level at the open and after some midday
consolidation, RFMD ran higher into the close. With strength
continuing in the Wireless sector and the Semiconductor index
(SOX.X) adding more than 8% today, it is no wonder that RFMD
tacked on an impressive $14%. RFMD is outperforming the SOX,
which is looking strong in its own right. While we're normally
hesitant about adding new positions after such a big one-day
rally, if the stock can clear its 200-dma ($22.97), it looks good
to run to its 7-month descending trendline at $25. Look for dips
near the 20-dma ($22) or the bottom of the December gap ($21.55)
to provide fresh entry opportunities. We're raising our stop
tonight to $20.
VRTS $47.89 +2.08 (+1.44) Well, how about that! Dips are still
buyable, and we got a really nice one early on Wednesday.
Uncertainty on the first day of the new year dropped VRTS right
to the $43 level, before the bulls decided to use the 20-dma
($43.77) as support and rallied the stock into the closing bell.
That was just the opening act for today's 4.5% rally, which took
VRTS solidly above its 200-dma ($45.82) again on solid volume.
Resistance is still in place at $48, but after today's breakout
over $47, it looks like a test of $50 resistance is in the cards.
Once again, the ascending trendline (now at $45) that begins with
the September lows provided a buyable dip and should continue to
do so. Of course, it didn't hurt to have the Software index
(GSO.X) rallying strongly again on Thursday, reclaiming the upper
side of the 200-dma ($184.46). Continue to target intraday dips
near the ascending trendline for initiating new positions. A dip
and bounce in the $46-47 area is buyable too. Just make sure the
buying volume remains strong on the rebound. We're raising our
stop to $43, just below yesterday's low.
**************
NEW CALL PLAYS
**************
ACS - Affiliated Computer Services $102.98 -2.25 (-3.34 this week)
Affiliated Computer Services is a global company that delivers
comprehensive business process outsourcing and information
technology outsourcing solutions, as well as system integration
services, to both commercial and federal government clients.
Few tech companies weathered the downturn as well as this solid
performer. Its weekly trend is a thing of bullish beauty. ACS
was one of last year's best performing computer services
companies and stocks. The stock gained over 70 percent in 2001,
while the company's earnings grew and continue to do so today.
In fact, ACS has maintained its estimates for several quarters out
and continues to meet or exceed its numbers. The company hasn't
released its official fourth-quarter earnings announcement, but
the numbers should be released in about two weeks. We'll relay
the official date once it's released. In the meantime, we
have a few weeks to play this strong stock into the earnings
announcement, when a split announcement could possibly be
announced. The stock pulled back to a long-term support line
around the $102 level in Thursday's session. The subsequent
bounce from that level could reveal that ACS is ready to make
another trip to relative highs over the short-term. That
would put ACS back above the $107 level. Traders looking to
play ACS can do so with a tight stop as the trend line from
which ACS bounced Thursday has held for a long, long time.
We're betting that it will hold again. But if we're wrong,
we're using a tight stop to manage risk. Our coverage stop
is in place at $101. Look for strength early tomorrow and
consider entries above $103.50 or $104.
BUY CALL JAN-100*ACS-AT OI= 527 at $5.10 SL=3.75
BUY CALL JAN-105 ACS-AA OI=1362 at $2.25 SL=1.25
BUY CALL FEB-105 ACS-BA OI= 10 at $4.00 SL=3.00
BUY CALL FEB-110 ACS-BB OI= 11 at $2.00 SL=1.00
Average Daily Volume = 1.93 mln
UTX - United Technologies Corp. $66.00 +1.66 (+1.15 this week)
As a diversified manufacturing company, UTX has four principal
operating segments: Otis (elevators and escalators), Carrier
(heating, ventilation and air conditioning systems), Pratt &
Whitney (aircraft engines and space propulsion), Flight Systems
(helicopter electrical systems). Between the Pratt & Whitney
and Flight Systems divisions, UTX participates in virtually all
aspects of the design and manufacture of aircraft propulsion
systems, from engines and their associated flight controls to
auxiliary power units, compressors and instrumentation.
Due to its heavy reliance on the Airline industry, shares of UTX
were severely abused in the wake of the attacks on September
11th, falling from the $66 level to just above $40 in the first
week's trading. Since tracing that bottom, the stock has been
in a persistent and sustained uptrend though, and Thursday's
close at $66 marks its highest close since mid-September. The
strength in the Airline sector (XAL.X) is clearly having a
beneficial effect, and today's breakout of the XAL over the $93
resistance level bodes well for the bulls. Boosting the XAL
over the past week has been good news from the likes of AWA and
CAL. AWA secured a $380 million government loan on Monday, and
today CAL had its loss estimates trimmed by Merrill Lynch. The
net effect is that conditions seem to be improving in the
Airline industry, and that bodes well for UTX's bottom line.
Speaking of their bottom line, UTX is due to report earnings on
January 17th and anticipation of that event could have the stock
continuing to rally in the interim. Target intraday dips to
support near $64 or possibly $63.50 (Wednesday's lows), for
initiating new positions. Otherwise, consider buying the
breakout above $66.25. Just keep in mind that the 200-dma
($67.99) will likely present solid resistance. We are initiating
the play with our stop set at $63, the site of the 10-week
ascending trendline.
BUY CALL JAN-65*UTX-AM OI=8710 at $2.20 SL=1.00
BUY CALL JAN-70 UTX-AN OI=1724 at $0.35 SL=0.00
BUY CALL FEB-65 UTX-BM OI=1255 at $3.50 SL=1.75
BUY CALL FEB-70 UTX-BN OI= 929 at $1.30 SL=0.75
Average Daily Volume = 2.35 mln
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*******************
PLAY UPDATES - PUTS
*******************
WEBX $26.32 +2.10 (+0.22) WEBX rolled over earlier this week at its
10-dma and continued lower in yesterday's session despite the
rebound in the tech sector. But the buying pressure in the tech
sector finally caught up with WEBX in today's session as the stock
traded higher throughout the day. It closed above its 10-dma and
above short-term resistance at $26.25. But it's at the point
where it could rollover once again depending on the broad tech
sector action tomorrow. In a weak market, look for a rollover from
current levels. But be careful with such entries. Make sure to
use an extremely tight stop when gaming such a strategy. Those
who prefer to wait for weakness before entering a put play on WEBX
might consider waiting for a decline below the $25 level.
CORR $23.12 -0.82 (-1.61) MLNM, who recently announced it would
acquire CORR, will hold an investor presentation next Wednesday
morning. The presentation could impact MLNM, which would in turn
impact our CORR play. In the meantime, the price action of our
play is closely tied to the Biotech Sector Index (BTK.X). MLNM,
and obviously CORR have been closely tracking the broader biotech
gauge. To that end, it's very important to continue monitoring
the BTK.X when gaming this play. For specifics, MLNM broke down
below its support level we were monitoring earlier this week,
which pressured CORR lower. In the short-term, it appears that
MLNM has found support around the $23.50 level. Look for further
weakness below that level in the coming sessions. The news after
the bell concerning Abgenix could result in further selling in
biotech issues tomorrow. If more weakness falls upon the BTK.X,
consider short-term exits in CORR if you obtained an entry above
$24.
CERN $49.80 -0.15 (-0.89) The broad market is off to a good start
in 2002, but CERN can't seem to find the right gear. The
rollover that began at the 20-dma (currently $51.31) last week is
still going, with the bulls desperately trying to hold above the
$49 support level. The stock is once again below its 10-dma
($50.65), and with the daily Stochastics still pointing south,
something is likely to give soon. A failed rally near the 20-dma
would make for an attractive entry point into the play, although
it may be best to wait for a break below $49 before taking a
position. The 6-week descending trendline is now resting at
$52.50, and weakness near that level could make for a great
entry. But we don't want to initiate new positions above that
level, as it would break the bearish trend. Keep stops in place
at $53.
*************
NEW PUT PLAYS
*************
EDMC - Education Management Corp. $35.05 -1.03 (-2.47 this week)
Education Management is a provider of proprietary postsecondary
education in the United States. Through its main operating
unit, the Art Institutes, the company offers bachelor's and
associate's degree programs and non-degree programs in the areas
of design, media arts, culinary arts and fashion.
Private educators had a good year last year. That was because
of the slowing economy. As companies laid off workers, those
workers sought out continuing education or completely different
areas of employment. As a result, companies such as Education
Management saw an increase in enrollment. The resulting boom
in business added to the bottom-line of these companies and
the stock prices reflected the positive outlook. But the stocks
in the education group have recently lost ground on the prospects
of a rebounding economy. While that sounds counterintuitive,
a rebounding economy may lead to less of a demand for secondary
education, which EDMC provides. The stocks in this group have
been selling off on those prospects recently, noting the recent
rollover in EDMC. The stock completed a double-top in early
December and broke below its 200-dma in Thursday's session.
Bearish traders can look for further weakness below the $35
level as an entry point in tomorrow's session. Also, look for
volume to increase on any continued decline below current
levels. Target the low $30s in the short-term. The stock has
historical support around the $31 level. Our stop is initially
in place at $37.25.
BUY PUT JAN-35*UKN-MG OI=10 at $1.95 SL=1.00
BUY PUT FEB-35 UKN-NG OI= 5 at $2.95 SL=1.50
Average Daily Volume = 2.47 mln
CVTX - CV Therapeutics $49.29 -1.75 (-4.39 this week)
CVTX is a biopharmaceutical company engaged in the discovery
and development of new small-molecule drugs to treat
cardiovascular disease. The company is conducting clinical
trials for three of its drug candidates. Ranolazine, the first
in a new class of compounds known as partial fatty acid
oxidation inhibitors, is in Phase III trials for the potential
treatment of chronic angina. CVT-510, is in Phase II clinical
trials for the potential treatment of atrial arrhythmias.
CVT-3146 is in Phase I trials for the potential use as an
adjunctive pharmacologic agent in cardiac perfusion imaging
studies.
There seems to be no shortage of bearish news in the Biotech
sector (BTK.X), as last year's darling technology sector is
getting the new year off to a rocky start. Beginning with
IMCL's FDA rejection on Monday, the BTK has been under heavy
selling pressure for the past 3 days, rolling over right at the
long-term descending trendline near $605. CVTX has been
weakening again with the broader sector and has given up more
than 8% this week. More bad news for the BTK came out after the
close with ABGX falling more than $6 in the extended hours
session after announcing that it will not explore use of its
antibody-based drug for use as a treatment for rheumatoid
arthritis due to disappointing mid-stage clinical trials. As if
we need more, it looks like CVTX just completed a
head-and-shoulders top with its drop below the $50 neckline
today. Look for a drop below near-term support at $48.25 to
trigger entry into new momentum-based positions. Otherwise,
look for an intraday bounce and rollover at either the $51 or
$53 resistance levels. Earnings are set to be released on
January 15th. We are initially placing our stop at $54.
BUY PUT JAN-50*UXC-MJ OI=387 at $3.40 SL=1.75
BUY PUT JAN-45 UXC-MI OI=981 at $1.35 SL=0.75
Average Daily Volume = 1.02 mln
EBAY - eBay, Inc. $68.00 +1.83 (+0.01 this week)
After developing a Web-based community in which buyers and
sellers are brought together in an efficient format, EBAY has
emerged as the dominant online auction site. The eBay dynamic
pricing format permits sellers to list items for sale, buyers to
bid on items of interest and all eBay users to browse through
listed items. Items listed on eBay include collectibles,
automobiles, art objects, jewelry, consumer electronics and a
host of practical and miscellaneous items. Although based in
the United States, through its subsidiaries, EBAY also operates
trading platforms in Germany, the United Kingdom, Australia,
Japan, Canada, France, Austria, Italy and South Korea.
The best put plays come from pinpointing relative weakness, and
it looks like that is what we have in EBAY. The Internet index
(INX.X) is trading well off its December highs, in contrast to
other sectors that seem to be leading the NASDAQ higher. Despite
several valiant attempts throughout the month of December, the
bulls just haven't been able to crest the $70 resistance level
on a closing basis and it looks like EBAY is putting in a
near-term top. Thursday's price action was likely due to the
broad advance in the NASDAQ, but it is notable that EBAY's
advance was rather tepid, coming on light volume. We're clearly
betting on a rollover in one of 2001's better performing stocks,
which makes this an aggressive, higher-risk play. To mitigate
that risk, we are initiating the play with a tight stop at $70.
Target failed rallies below $70 for initiating new positions.
With the move back above the 20-dma ($67.17), more cautious
traders may want to wait for the stock to move back below that
level before taking a position. Monitor the INX for signs of
weakness before playing.
BUY PUT JAN-70*QXB-MN OI=1015 at $4.20 SL=2.50
BUY PUT JAN-65 QXB-MM OI=6142 at $2.05 SL=1.00
Average Daily Volume = 7.85 mln
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The Option Investor Newsletter Thursday 01-03-2002
Copyright 2001, All rights reserved. 3 of 3
Redistribution in any form strictly prohibited.
*********************
PLAY OF THE DAY - PUT
*********************
CERN - Cerner Corporation $49.80 -0.15 (-0.89 this week)
Cerner Corporation designs, develops, markets, installs, hosts
and supports software information technology and content
solutions for healthcare organizations and consumers. CERN's
product categories include Enterprise Systems, Financial and
Operational Management Systems, Decision Support Systems and
Knowledge Solutions, Point of Care Clinical Systems, Systems
for Clinical Centers, Personal Health Systems and Interface
Technologies. Clearly the company has a product or service
for literally every phase of the healthcare process.
Most Recent Update
The broad market is off to a good start in 2002, but CERN can't
seem to find the right gear. The rollover that began at the
20-dma (currently $51.31) last week is still going, with the
bulls desperately trying to hold above the $49 support level.
The stock is once again below its 10-dma ($50.65), and with the
daily Stochastics still pointing south, something is likely to
give soon. A failed rally near the 20-dma would make for an
attractive entry point into the play, although it may be best
to wait for a break below $49 before taking a position. The
6-week descending trendline is now resting at $52.50, and
weakness near that level could make for a great entry. But
we don't want to initiate new positions above that level, as
it would break the bearish trend. Keep stops in place at $53.
Comments
CERN's divergence from the software sector has caught captured
our attention. The stock finished lower in Thursday's session,
while the GSO.X tacked on 4.30%. Its under performance Thursday
may portend weakness in the short-term, especially if the
broader tech sector pulls back. Watch for CERN to fall below
$49 in Friday's session.
BUY PUT JAN-50*CQN-MJ OI=298 at $2.40 SL=1.25
BUY PUT JAN-45 CQN-MI OI= 10 at $0.75 SL=0.50
Average Daily Volume = 723 K
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***********
OPTIONS 101
***********
Pump Up the Volume
Buzz Lynn
buzz@OptionInvestor.com
Sometimes, a price move is just a price move, and as Sigmund Freud
once said, "Sometimes a cigar is just a cigar". However, a price
move backed by volume is a market-altering event. Sigmund offers
no comment here, so please allow me to delve into the significance
of volume.
While volume by itself cannot foretell the long-term direction of
a stock or the market, it can provide us with the footprints of
great trading opportunities that lead to meaningful profits. Case
in point is the equities market today. Volume is the highest I
can recall in weeks. Coupling that with candle patterns butting
up against horizontal, retracement, and moving average resistance
leads to spectacular breakouts that we saw today.
For the record, the tech-led NASDAQ was up 65 points to 2044 on
2.2 bln shares while the Dow was up 98 points to 10,172 on 1.4 bln
NYSE shares traded.
Please understand, I'm not suggesting you throw your whole trading
account at any stock and sleep peacefully forever after just
because volume bumped up. But volume coupled with other signals
is icing on the cake and confirmation of a higher success
probability. In short, it's a nice insurance policy.
Here is why it is significant. On the average day, there are ebbs
and flows of investors and "professional" (I use the word loosely)
fund managers making decisions to buy and sell. Prices fall when
demand is less than supply or supply is greater than demand.
Conversely prices rise when demand is greater than supply or
supply is less than demand. Remembering basic economics, price is
all about supply and demand.
One other thing - we've all heard that well over 50% of U.S.
households are invested in "the market" where the logical
conclusion is that money managers and institutional investors no
longer have the ability to move markets as they used to. Don't
buy it. Where do those 50%+ of households have their money? With
mutual funds and 401-K's - all with money managers on an
institutional level. So it is safe to assume that the pros still
have plenty of sway over markets and that you and I can go along
for the ride on their coattails and profit from that knowledge.
There should be no question that institutional interest is the
only thing that drives substantial volume, not us in our homes or
offices daytrading stocks and options.
Now tying this all together, it makes logical sense that on high
volume days, institutions must be involved. We won't ever see
high volume and big price moves without their participation.
Volume is the footprint left by market elephants walking in the
cherry orchard. Fortunately for us (and as I'm often fond of
saying), you can't hide an elephant in a cherry tree. They are
always visible especially when they are taking a position in low
float or high profile stocks.
Remember that without institutional participation, a price move is
just a price move. But with institutions involved, large volume
increases can be used as a signal to track otherwise invisible
elephants accumulating a position. (Of course, this works in
reverse too and prices can fall as an equity undergoes
distribution meaning more selling than buying as indicated by
volume.)
Now comes a logical chicken/egg debate. Did the volume cause the
price spike or did a euphoric price gap spark short covering,
which begat bigger price moves? The answer is yes. The fact is
that it was probably a combination of both. Short squeezes help,
but a bullish attitude has to be prevalent to get the squeeze to
have any staying power.
This is all about trading, not owning, so give careful evaluation
to your intent before you enter a trade. Again, a word of
caution. Just as the market lows in September had many thinking
that the market was a lost cause and dead forever, the VIX was at
a multi-year high. In fact, the markets by indicators on the
chart were then at a low and have gone up since. The same, but in
reverse, may be true here as charts top out and the VIX falls
closer to 20. This may in fact prove to be a market top as soon
as everyone is convinced that recovery and resumption of the good
old days of double-digit percentage price gains are here again to
stay. Repeat: trade using volume; don't invest.
Let's take a look at a few 60-min charts to give us a better feel
for how we might have profited. While the daily chart is more
useful for the investor, the 60-min chart not only shows intraday
volume but also shows comparative timeframe volume for the past
few weeks. The intent here is to focus on the volume, not just
the candles breaking resistance. Note that these were not
company-specific volume spikes, but market-wide contributors to
overall cumulative market volume. In other words, volume happened
everywhere; not just to those shown.
NVDA 60-min chart:
Note the increase in yesterday and today's volume over previous
weeks, and note how volume (aka institutions) gave a big push over
resistance. That is technically significant. But for the trader,
based on a lack of volume in the final doji candle, NVDA may be
nearly out of steam.
INTC 60-min chart:
Same story here with INTC - volume induced breakout
NEWP 60-min chart:
You can't see it because it happened in November, but once again
as shown by the heavy red horizontal line, NEWP saw a price
breakout on heavy volume. Volume here is significantly above the
average and the stock has a very low float, which helped it pick
up 15% today. With volume like this that never let up even into
the close, there may be more juice here.
Here's one that didn't fare so well.
QCOM 60-min chart:
All the volume here is back in mid-December when the stock was in
decline. No increase in demand here as indicated by volume.
Consequently, it's not very tradable in either direction. If
there is any good news, it's that the price stabilized as volume
fell in the last few days of December. Major damage may be over,
but it still is not tradable.
One last one - a biggie - CSCO
CSCO 60-min chart:
Because of the huge float and huge ADV of CSCO, the volume
distinction can't be seen as well on the chart above. But the
real numbers are as follows: ADV = 73.4 mln shares; today's
volume = 91.4 mln shares. The buying intensity carried through to
the close too.
Isn't that helpful? The volume increases do not necessarily mean
that these will now grow to the sky. But just take a look at some
of the other charts of our old favorites. If there is no spike in
volume today, I'd lay odds that gains were minimal, except for the
sector coattail effect. That might also help to explain why the
volume spikes came in distinct sectors like semiconductors and
networking. We didn't see MO, PEP, or KO lighting up the charts
today because they were not favored sectors.
Make no mistake about it. These are for trading only by letting
the volume be our guide in conjunction with bullish candles.
Because few other sectors were the beneficiary, I would not take
this to be anything more than a trading rally subject to pullback
within a larger "January effect" move. But it is instructive to
see how volume increases can affect price moves.
Now for the fun part - how to find some of your own! This is
really so simple, it's anti-climactic. Simply use q-Charts hot
list button (the burning fire symbol on the menu bar) to pick
volume gainers. It's that easy!
Trust your instruments!
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